Emergent Order in The Lego Movie

Mild spoiler alert.

I loved the Lego Movie. I was floored with its treatment of emergent order. At one point the hero encouraged fellow Lego people to try things, no matter how stupid it sounds, no matter how much others ridicule it, because you never know, it just may work.

Made me wonder if Russ Roberts, John Papola or Nassim Taleb consulted on the screenplay.

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The (kids) gloves are coming off?

Russ Roberts and Don Boudreaux, of Cafe Hayek, don’t know what to call their recent posts about Paul Krugman. I have a suggestion: It’s about time.

Economist Russ Roberts criticizes Krugman for his treatment of intellectual opponents, like economist Robert Barro, in this case. Roberts quotes two passages from Krugman’s own economics textbooks that support an argument that Barro makes:

Additional transfers to people with earnings below designated levels motivate less work effort by reducing the reward from working.

Yet, while Krugman said as much in his text books, in his blog post, Krugman does a poor job of characterizing this incentives-driven view of what Barro calls “regular economics”:

But if you follow right-wing talk — by which I mean not Rush Limbaugh but the Wall Street Journal and famous economists like Robert Barro — you see the notion that aid to the unemployed can create jobs dismissed as self-evidently absurd. You think that you can reduce unemployment by paying people not to work? Hahahaha!

And:

If you read Barro’s piece, what you see is a blithe dismissal of the whole notion that economies can ever suffer from am inadequate level of “aggregate demand” — the scare quotes are his, not mine, meant to suggest that this is a silly, bizarre notion, in conflict with “regular economics.”

Not exactly. I did read Barro’s piece. He sets a good example of how to characterize opposing views, accurately and without straw-manning it like a 9-year-old who just put gum in her sister’s hair because “she deserved it”:

Keynesian economics argues that incentives and other forces in regular economics are overwhelmed, at least in recessions, by effects involving “aggregate demand.” Recipients of food stamps use their transfers to consume more. Compared to this urge, the negative effects on consumption and investment by taxpayers are viewed as weaker in magnitude, particularly when the transfers are deficit-financed.

Thus, the aggregate demand for goods rises, and businesses respond by selling more goods and then by raising production and employment. The additional wage and profit income leads to further expansions of demand and, hence, to more production and employment.

And, it wasn’t quite a ‘blithe dismissal’. It was an argument that Krugman chose to blithely dismiss himself, instead of addressing it.

So, why did Krugman describe Barro’s argument as he did? Why not simply state the argument. For example, Barro believes that the unemployment creates incentives for people not to work, something I also believe and have written in my textbooks. Where I disagree with him is that I believe during recessions, those incentive effects are overwhelmed because there are fewer jobs a lot more people who want them.

Don Boudreaux goes one further and criticizes the people who seem to relish in their own intellectual capacity to deal with Krugman’s nuances (by using bigger words than I used in the previous paragraph), while missing a larger point, that economics shouldn’t be used to justify stealing.

I did something that I rarely do. I read Krugman’s whole piece, and was reminded of why I choose not do so. Not only do I agree with the points made by Roberts and Boudreaux above, but there are other things that bug me.

Here’s a couple of those things.

1. He says of Keynes’ “discovery” of aggregate demand:

…while I’m generally against scientific pretensions, it amounted to a scientific revolution, something like plate tectonics in geology.

First, I don’t put much stock in anyone who compares economics to science. I think they will be prone to be more confident in their views than they should be, which can lead to disastrous results.

Second, why make this analogy if he really is “generally against scientific pretensions.” Just not in this case? Aggregate demand is lone example in economics where scientific pretensions is warranted?

Something else bugs me. Krugman writes:

Think, for example, about the Great Recession and its aftermath. Regular economics says that economies should normally get richer each year, as their work force and capital stock grow, and technology advances. But after 2007 the United States and other advanced countries suddenly went into reverse, becoming poorer instead of richer, and for an extended period too [pointing to a chart of declining GDP in the recession].

Does regular economics say that economies should get richer every year? Maybe. I haven’t heard that one.

Is GDP a measure of wealth? I thought it was a measure of economic activity. Can’t GDP decline and wealth still go up? If Bill makes $100,000 a year and has $1 million in Apple stock, does his wealth go down if his salary declines to $90,000? Not necessarily. It depends on how much he spends, doesn’t it? If he spends $80,000 a year, his wealth can still grow after the decline in his salary, no?

Perhaps I’m mistaken in my understanding of GDP. If so, please correct me. But, if not, it seems that Krugman’s language is unnecessarily sloppy here for a Nobel economist.

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Pope II

Here I wrote about the Freakonomics podcast with Jeffrey Sachs which covered the Pope’s anti-capitalism remarks.

Shortly thereafter, in Taleb’s book, Antifragility, I was surprised to read what I think is a more thoughtful response to the Pope’s remarks and one that supports the Pope’s view.

What surprises me even more is that what Taleb writes about isn’t new to me. It’s a frequent topic of conversation, something that I know well. But, I hadn’t taken it to the logical conclusion.

First, Taleb points out that even the patriarch of capitalism, Adam Smith, was

…extremely chary of the idea of giving someone upside without downside and had doubts about the limited liability of joint-stock companies (the ancestor of the modern limited liability corporation). He did not get the idea of transfer of antifragility, but he came close enough.

And he detected–sort of–the problem that comes with managing other people’s business, the lack of pilot on the plane:

The directors of such companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own.

Let me make the point clearer: the version of “capitalism” or whatever economic system you need to have is with the minimum number of people in the left of the Triad.

“The Triad” is Taleb’s classification of systems as (from left to right) fragile, robust and antifragile; and what he means by ‘left of the triad’ is people who get the downside, as well as the upside, or they have skin in the game.

Taleb contiues:

There is a difference between a manager running a company that is not his own and an owner-operated business in which the manager does not need to report numbers to anyone but himself, and for which he has a downside. Corporate managers have incentives without disincentives — something the general public doesn’t quite get, as they have the illusion that managers are properly “incentivized.” Somehow these managers have been given free options by innocent savers and investors.

He provides an example:

…banks have lost more than they ever made in their history, with their managers being paid billions in compensation — taxpayers take the downside, bankers get the upside [Russ Roberts has been saying this for years]. And the policies aiming at correcting the problem are hurting innocent people while bankers are sipping the Rose de Provence brand of summer wine on their yachts in St. Tropez.

To bring this all together:

We are witnessing the rise of a new class of inverse heroes, that is, bureaucrats, bankers, Davos-attending members of I.A.N.D. (International Association of Name Droppers), and academics with too much power and no real downside and/or accountability. They game the system while citizens pay the price.

At no point in history have so many non-risk-takers, that is, those with no personal exposure, exerted so much control.

Now, let’s re-read what the Pope wrote (quoted from the Freakonomics post):

“[S]ome people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world. This opinion, which has never been confirmed by the facts, expresses a crude and naïve trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system. Meanwhile, the excluded are still waiting. … One cause of this situation is found in our relationship with money, since we calmly accept its dominion over ourselves and our societies. The current financial crisis can make us overlook the fact that it originated in a profound human crisis: the denial of the primacy of the human person! … While the earnings of a minority are growing exponentially, so too is the gap separating the majority from the prosperity enjoyed by those happy few. This imbalance is the result of ideologies which defend the absolute autonomy of the marketplace and financial speculation. Consequently, they reject the right of states, charged with vigilance for the common good, to exercise any form of control. A new tyranny is thus born, invisible and often virtual, which unilaterally and relentlessly imposes its own laws and rules.

To me, this reads like leftist dribble, where their intuition leads them, perhaps, in the right direction for outcome, but the wrong direction for cause.

Maybe the Pope is right that there are some fundamental problems in the mixed markets that have emerged.

But, they’re wrong about the cause of those problems. They blame things like “trickle down theories” (Thomas Sowell challenges us to name one economist who used “trickle down“).

But, the part of the Pope’s passage that reminds me of Taleb’s point is:

…expresses a crude and naïve trust in the goodness of those wielding economic power…

Perhaps that is true. And Taleb tells us why:

At no point in history have so many non-risk-takers, that is, those with no personal exposure, exerted so much control.

They don’t have downside.

This includes politicians, apparatchiks in government agencies, economists and — the one that I am really disappointed that I missed because of my biases — managers of businesses who only have upside and no downside. I’ve even noticed that senior managers often have the same characteristics as politicians, but darn if I haven’t carried that through.

So, as I like to say, all problems can be traced to problems with feedback — I think Taleb exposes a couple of real feedback problems in — not free markets — but our mixed market economy. That feedback problem is that too many people “wielding economic power” don’t have downside. Rather they have incentives to game the system for their upside.

How can this be changed? Taleb gives one example that surprised me:

…in some countries such as Brazil, even today, top bankers are made unconditionally liable to the extent of their own assets.

Think about that. Would bankers act differently if they may have to repay the bonuses they received in what are now apparent as the fraudulently fueled good-times?

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Party Planning vs. Raising Kids

Lant Pritchett uses a starfish/spider analogy to illustrate differences between bottom-up/top-down systems.

Steve Landsburg explained that people mistake central planning as being something like planning a birthday party. Based on this vision, they think it can work well. You just need good planners. Landsburg says that folks who make such mistakes simply can’t imagine the complexities involved when hundreds of millions of people are added to the mix, so even good planners won’t do well.

Russ Roberts recently distinguished between engineering and economics problems in a post on Cafe Hayek, building off the following Soviet joke:

Yuri Gagarin’s daughter answers the phone.  ‘No, mummy and daddy are out,’ she says.  ‘Daddy’s orbiting the earth, and he’ll be back tonight at 7 o’clock.  But mummy’s gone shopping for groceries, so who knows when she’ll be home.’

Of course, her Mom may be an avid shopper. But, the joke was meant to convey that centrally planning something as mundane as producing products that people want, at reasonable prices and making them available in nearby stores is a much more vexing problem than sending man into orbit. Prices do a better job of coordinating that effort.

I made a similar point in a follow-up to the Landsburg post, because I’ve heard too many people use the “If we can send a man to the moon, then we can do anything” fallacy.

Though, I didn’t distinguish it then as an engineering problem. That is an important observation. It’s also a good question to keep in mind when people start using the man on the moon fallacy, are we solving an engineering or economics problem?

But, I still think some folks may have a difficult time understanding exactly how an economics problem differs from an engineering problem. For many, both fall into one category: complicated. So, if we can solve one complicated problem, why not another?

I think it might help to go back to Landsburg’s party planning analogy. An engineering problem is like planning your kid’s birthday party. It’s straightforward (place, invites, plates, cake, fun, done) and it’s a relatively short time commitment. The short time commitment is important. Any longer and it might be harder to get grandparents to help clean up or for guests to come.

An economics problem is more (though still not quite) like raising kids. That’s much more complex than planning a two-hour party. It doesn’t end. It’s not easy.

Just when you think you figure it out, it changes. Why? Because kids are human and they go through phase. They have preferences. They respond to rewards and punishments — differently to different ones. They make decisions. They like what they like. They change. They will fight you. They won’t always do what you tell them. You need to let them make mistakes and learn for themselves, even though it is painful to do so.

Now, I say it’s not quite like an economics problem because people can do a good job of raising kids. Though, there aren’t many truth-telling parents who will say that it’s easy.

So, an economics problem is much more like being tasked with raising all of the kids in your town, or maybe your state, or more.

Multiply the frustrations, the reactions, the support, attention and love required by a thousand or a million kids.

We’re all smart enough to know that’s impossible. We would never sign up for it because we know we’d do those kids a major disservice. Hmmm…..

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Avoiding reality sometimes works

Good blog post from Clay Shirky about the Obamacare website (Thanks to Russ Roberts @ Cafe Hayek). Here are a few excerpts.

Shirky demonstrates another lesson from The Croods, on why executive paid him to collect information from their own employees. Here he describes an instance where he is with a company’s programmer in the presence of its executives (emphasis mine):

…the programmer leaned forward and said “You know, we have all that information downstairs, but nobody’s ever asked us for it.”

I remember thinking “Oh, finally!” I figured the executives would be relieved this information was in-house, delighted that their own people were on it, maybe even mad at me for charging an exorbitant markup on local knowledge. Then I saw the look on their faces as they considered the programmer’s offer. The look wasn’t delight, or even relief, but contempt. The situation suddenly came clear: I was getting paid to save management from the distasteful act of listening to their own employees.

Humility is not common in the executive suite.

On bottoms up vs. top down (trial and error, specifically):

The idea that “failure is not an option” is a fantasy version of how non-engineers should motivate engineers. That sentiment was invented by a screenwriter, riffing on an after-the-fact observation about Apollo 13; no one said it at the time. (If you ever say it, wash your mouth out with soap. If anyone ever says it to you, run.) Even NASA’s vaunted moonshot, so often referred to as the best of government innovation, tested with dozens of unmanned missions first, several of which failed outright.

Failure is always an option. Engineers work as hard as they do because they understand the risk of failure. And for anything it might have meant in its screenplay version, here that sentiment means the opposite; the unnamed executives were saying “Addressing the possibility of failure is not an option.”

Unfortunately, every once in a while, avoiding reality sometimes works. Sometimes people get lucky when they exclaim that ‘failure is not an option’ and actually create something successful. Those people can be dangerous.

The curious task of economics…

Russ Roberts, host of EconTalk podcast, often reminds his listeners and his Cafe Hayek blog readers that F.A. Hayek said:

The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.

I think Edward Glaeser did a good job of fulfilling this task in last week’s EconTalk podcast when it comes to nice-sounding government policies that may have unintended consequences of hurting cities.

Here’s one consequence I hadn’t thought of regarding government policies meant to encourage more home ownership:

Having a very pro-home ownership policy also means you have an anti-urban policy, because typically single family houses are owner-occupied whereas multi-family dwellings are rented; on average more than 85% of multi-family dwellings with 5 or more units are rented, exactly the same percentage of households for single-family occupancy being owner-occupied. So if you are going to have federal policy which both directly, through let’s say the home ownership interest deduction, or indirectly, through Fannie Mae and Freddie Mac are going to subsidize owning, you are going to be stacking the deck against high rise houses.

Glaeser also comments on how school districts hurt cities (my parents moved to a suburb when I was a child primarily to get their kids into a better school district):

Now the last thing that artificially stacks the deck against cities is just the way our local education systems work. So, by your telling me your kids like to go tromping around in grass, that’s great; my kids do that. I have no problem with parents making those choices. However, I grew up in the streets of Manhattan and that can also work perfectly well. The problem is that we’ve created such a strong schooling incentive for people to move out of those cities that have weak school systems. I think anything that we can do that tries to somewhat reduces those spacial, those schooling-related, which are fundamentally government-created incentives to suburbanize, that’s probably a good thing.

As I heard Glaeser say this, I was reminded of how Arnold Kling decomposed freedom into having the power of voice and exit. People with bad ideas to use public schools as a means to achieve their desirable social goals took over many public school districts and drowned out the power of voice for many. They didn’t worry about it because public schools were free and they figured that folks would continue to send their kids there. What were they going to do, move?

Yes, that’s exactly what happened. They exercised their power of exit.

The neighborhood I grew up in was a nice, middle class neighborhood. It had been for 40 years from when it was first built. Sadly, it turned into a pit soon after we left. And not because that was the natural order of things. The public education system was failing to educate and that chased people away.

More people wanted out than wanted in. ‘Supply and demand’ says that means home prices will go down. When prices fell, folks who couldn’t afford much because they hadn’t made good life choices, or simply didn’t care, moved in. I remember my grandparents finally moving from the home that I believe they bought new when they discovered their next door neighbors were crack addicts willing to do just about anything for their next score.

There are neighborhoods of similar age and design in different parts of the metro area that are subject to different public school systems and they are still thriving.

It’s amazing to me that the very people who love cities so much, the so-called intellectual elites, have done so much damage to them. But, it’s the perfect example of Hayek’s fatal conceit and the curious task of economics.

Russ Roberts on the minimum wage

Russ Roberts had some good recent posts about the minimum wage on Cafe Hayek. The paragraphs below are from his post about his follow-up thoughts to a debate he participated in to abolish the minimum wage:

Everyone, on the left and the right, agree that employers are eager to save costs and will substitute machines for workers or outsource production if those changes are profitable. Why will artificially higher wages created by minimum wage legislation not lead to similar substitutions?

No joke. But, of course, proponents of minimum wage will cite ‘empirical evidence’ that shows that raising the minimum wage has no effect on jobs or employment. And, of course, they never consider that these studies may not tell the whole story or have limitations.

They also seem to forget basic econ where we are taught that if a price floor is well below the going-market rate, it won’t have much affect on supply. In other words, if the minimum wage is well below the going market labor rate, then it won’t have much effect on jobs. For example, if I set a minimum wage at $0.50/hour, most people would intuitively know that’s so low, it doesn’t  effect anyone — employees or employers.

So, while minimum wage studies are often heralded as empirical support for raising the minimum wage, they are much more likely to be empirical support for that basic econ understanding of a price floor.

Next (emphasis mine):

The weird part of the debate over the magnitude of the employment effects, is that when someone uses the reductio ad absurdum of a minimum wage increase to say $50 or $100 an hour, everyone understands that won’t work because it would destroy the labor market. So where do those disemployment effects kick in? If the minimum wage is small enough so that it doesn’t cause job losses, then it can’t be having much of an effect boosting wages.

Yes. Where do the disemployment effects kick in? Great question and I never hear anybody ask it or answer. It’s similar to the ‘rich must pay their fair share’ tax debate where the answer is always ‘more’.

It occurred to me after reading this paragraph that the same people who cite empirical evidence that changes in the minimum wage don’t affect jobs (that price floors below the going market rate don’t change supply), don’t seem interested in asking about empirical evidence that raising the minimum wage actually increases wages.

I suppose they assume that if it doesn’t change the number of a jobs and a few people are marking more now, then wages must go up.  But, that assumes a lot. For example, it assumes other things don’t change — like the number of hours worked and the value of fringe benefits like employee discounts — to name a couple.

“Losses Encourage Prudence”

I wonder if Russ Roberts saw the opinion piece, How to Shrink the “Too-Big-to-Fail” Banks, in Monday’s Wall Street Journal from Richard Fisher and Harvey Rosenblum, who are, respectively, the CEO and Director of Research, at the Federal Reserve Bank of Dallas.

I wonder if Russ Roberts has seen it, because it appears to agree with his hypothesis that a history of government bailout of banks contributed to the financial crisis, because bankers took on more risk than they otherwise would.

Here are Fisher and Rosenblum’s first three paragraphs:

A dozen megabanks today control almost 70% of the assets in the U.S. banking industry. The concentration of assets has been in progress for years, but it intensified during the 2008–09 financial crisis, when several failing giants were absorbed by larger, presumably healthier ones. The result is a lopsided financial system.

Meanwhile, the mere 0.2% of banks deemed “too big to fail” are treated differently from the other 99.8%, and differently from other businesses. Implicit government policy has made these institutions exempt from the normal processes of bankruptcy and creative destruction. Without fear of failure, these banks and their counterparties can take excessive risks.

It also emboldens a sense of immunity from the law. As Attorney General Eric Holder admitted to the Senate on March 6, when banks are considered too big to fail it is “difficult to prosecute them . . . if we do bring a criminal charge, it will have a negative impact on the national economy.”

That last paragraph paints an image for me of the TBTF bankers holding the economy hostage for the taxpayer ransom. I wish I could draw.

Here they sum up the problem rather well:

…market discipline is still lacking for the largest dozen or so institutions, as it was during the last financial crisis. Why should a prospective purchaser of bank debt practice due diligence if in the end, regardless of new layers of regulation and oversight, the issuing institution won’t be allowed to fail?

The return of marketplace discipline and effective due diligence of banking behemoths is long overdue.

In case you are wondering, prospective purchasers of bank debt practicing due diligence is an example of market discipline, just like you practicing due diligence on your car purchase.

Credit Fisher and Rosenblum for going on to offer a solution, which involves rolling back the Federal government safety net and restructuring TBTF banks into entities that can go through speedy bankruptcies so they will be “too small to save”.

I like it. Read the whole thing.

Proposal for new requirements for econ majors

1. Demonstrate that as an economist, you know your limits. As Russ Roberts writes:

Economics isn’t rocket science; it’s a lot harder. We should admit as much and when asked to measure things we cannot measure, we should admit our ignorance.

As an economist, you should be the biggest and best critic of your work.

Even when your work seems airtight, you should caution that you may be missing something.

You should invite criticism of your own work.

When somebody wants to use your work to justify policy positions, you should be warning them, rather than encouraging them.

You should be able to properly identify your own biases and tendencies.

Economists should take an oath similar to the Hippocratic Oath taken by physicians: First, do no harm.

2. Discussion requirements: You should be able to carry out discussions and debates without fallacy.

The persistent use of fallacy in discussion (rather than the occasional and willing-to-admit-it-when-pointed-out use) should be taken as a signal that you place a higher priority on what you believe is true than what is true.

“…it isn’t science”

In case I haven’t mentioned it before, Russ Roberts is on my list of non-pathetic economists. I recommend reading his article, Know Your Limits, in The European Magazine.

This article sums up nicely why Russ thinks we should be more skeptical of economists who are not willing to admit or, worse, aren’t aware of the limits to what they know.